It is never comfortable to play the role of wet blanket. Yet that’s exactly how I felt as I sat on a Rice Alliance panel in Austin earlier this month with Gowalla CEO Josh Williams and others. The panel was titled “The Business of Location: Making Money with Geo-Aware Services,” and moderated by Mashable’s Josh Catone.

Most people were clearly there to hear Williams, who has become an industry leader, and I couldn’t help but feel a little unpopular in offering a reality check to a room full of innovators. In fact, when I suggested that our not-so-sexy platform was about to monetize with a major media partner, the whole room erupted in laughter. And yet there was also a point of vindication in my contrariness to everyone’s focus on location and not on revenue and important business metrics, when even Williams admitted that checkins are destined to fade away as a user motivation.

It isn’t that I’m bearish on location services. Far from it. Real-time and location-based marketing in all its forms are, in my opinion, the final big gold rush of Web 2.0. A lot of money will be made here. I’m just wondering what appropriate success metrics we should expect from the LBS industry.

Having lived through the last industry bubble, the current hype over LBS seems oddly familiar. In the late 1990s, everything became a focus on how many eyeballs came to a website — big deals with big name brands, and the promise of a brighter future powered by the web. Fast forward to today, and the metric du jour is the number of users of an app, and all the major LBS players are fighting over case studies with big brands.

This is the same fight for mindshare that occurred with major software companies ten years ago. It wasn’t a focus on profitability or real business value — it was a PR scrum where everyone was out to make a name for themselves. And we all remember how that ended. All of a sudden, investors started asking tough questions about those nasty terms — business value, profitability, and sustainability. Huge valuations were followed by a huge crash. Investments were ultimately judged by how well the capital was used to make money and build lasting businesses.

Checking In on the Mainstream

Let’s back up a minute and investigate the value proposition for location services. They give people the ability to share where they are with friends and businesses near them. We’re told that this is so compelling for people that it will create a new market where products and services are sold in new ways. I suppose it’s possible for LBS to be the next wave of social networking, as well.

All of that might make sense. But in practical terms, what will LBS providers need to achieve to make this a mainstream reality that justifies current valuations?

Repeated and ongoing “checking in” or automated exposure of a user’s location;

Repeated and ongoing participation from businesses, large and small, who will see this as a necessary component of mobile marketing over and above everything else that is out there; and

Acceptance of LBS as a reasonable way for everyday people to express themselves despite obvious privacy and safety issues that go along with sharing one’s location.

Let’s face it: This is a pretty high bar for mainstream audiences who are not in the tech community’s echo chamber of tweeting, social media, blogging, and the like. Add to this the fact that these mainstream audiences already use Facebook. They buy Android and Apple phones. And especially in large cities, some use Yelp to determine where they are going to eat, entertain themselves, and socialize. Any of these existing players who have proven themselves in other areas can become a major or even dominant LBS competitor almost overnight.

The LBS Metrics We Should Really Be Following

So what does the data tell us about the health and utility of location-based services today? Unfortunately not much. Foursquare has been most forthright about usage of their system. The app has grown tremendously in 15 months, and now has 1.2 million users, who have checked in 40 million times, we’re told. Doing the rough math, that’s about 30 checkins per user for the ~450 day life of the application. If you assume that the average user has been on the system for half that time, that’s one check in per week per user. Impressive progress, yes. But that is hardly mass adoption or evidence of repeated, habitual use. It is proof of satisfying a need in the innovator crowd, but nothing more so far. It does not give us an indication of long-term LBS value and whether or not we’re looking at the next big thing.

And as for local business utility, the usage numbers are way too low when brought down to a local level to impact the bottom-line of most businesses. A million worldwide users of an LBS application translates to a very, very small share of any local market. Sure, a case study here or there may indicate success in a specialized situation, but by and large, most local businesses can’t consider access to a small, occasionally interested local audience via LBS to truly move the needle on revenue and profit.

Proof of true success for LBS will come in the form of the metrics that aren’t being shared today. I’m talking about time-trending numbers on the actual use of location-based applications. Here are a few suggestions:

Percent of Active Users: What is the percentage of users who have checked in during the last day? The last week? This will give us an indication of utility and/or fatigue.

Revenue: Exactly how is all of this translating into revenue? For the LBS app companies? For brands that advertise? For local businesses?

Average Number of Checkins Per Day: How often do people check in? Is this derivative metric improving or declining? This will tell us about the value proposition of checking in for the average consumer.

Time Spent in Application: What is the average time spent per day inside the application per user? This informs the market about the experience consumers have with the application and how well it captures users’ attention.

Percent of Users Who Have Been Inactive Over the Last Month: How many people installed a location-based app but got tired of it and now no longer effectively use it?

Sharing stats on your total user base or total number of checkins only tells part of the story –- and a rather uninteresting part at that. What really matters to marketers is how engaging the app is. If it is another icon on an iPhone that hasn’t been clicked in a while, it’s useless to a marketer. If a user isn’t updating location regularly, it has limited utility for ongoing proximity marketing.

Conclusion

Many brands are trying to get into the craze right now because it is novel, and that’s great. But the real test is whether or not location-based services indeed create business value. Put another way — it isn’t an achievement for a major consumer brand to run a pilot with an LBS provider. It is a major achievement if true business value, and not just PR value, was driven by the relationship. Nobody seems to be asking these tough questions.

I respect the job that all the founders of the major LBS companies have done to popularize the applications. But the numbers that have been shared so far don’t warrant all the hype. The next step for major LBS players is to drive real business value to companies while keeping the consumer experience engaging for more than just the early adopter crowd. That’s a tough, tough task that goes well beyond where any are today.

Mashable
is a global, multi-platform media and entertainment company. Powered by its own proprietary technology, Mashable is the go-to source for tech, digital culture and entertainment content for its dedicated and influential audience around the globe.